Minority shareholders accuse Taro of manipulating financials

IsZo Capital claims that Taro understated its profit in advance of the vote on Sun Pharma's ofer to purchase.

The offer by India's Sun Pharmaceutical Industries Ltd. (BSE: 524715), the controlling shareholder in Taro Pharmaceutical Industries Ltd. (NYSE: TARO), to purchase the minority holdings in the company, continues to face opposition. Sun Pharma, which owns 66% of Taro, wants to take the company private, and has made an offer to purchase at $39.50 per share (the offer has been raised from $24.50 per share). Taro's share price closed at $46.41 yesterday. Some of Taro's minority shareholders claim that the offer to purchase is unfair, and even accuse the company of manipulating its financial reports. Taro denies the allegations, but now has to deal with legal proceedings commenced against it on Friday.

Taro is a generic drug company which specializes in dermatological ointments, tablets, and injections, and other medical products. It posted a net profit of $65.4 million for the third quarter, 10.9% more than for the corresponding quarter of 2011. Revenue rose 16.4% to $161 million.

Last week, IsZo Capital Management LP, an investment fund that is a minority shareholder in the company, sent a letter to Taro's board of directors, in which it claimed that Taro had intentionally understated its net profit in its quarterly financial reports by artificially increasing its reserves related to product returns.

"Taro and Sun delivered such evidence with the reported third quarter financial results; results suspiciously inconsistent with readily available commercial sources of Taro's prescription and sales data," IsZo Capital managing partner Brian Sheehy wrote in a letter to Taro shareholders. He added, "Taro is gaming its reserves for returned products and similar items to artificially deflate net sales data, conveniently, just a month prior to the December 6th special shareholder meeting to vote upon the proposed Sun merger." He went on to say, "Given that Taro management's six-month 2012 forecast will be between 68% and most likely 100% too low, we don't believe that the special committee and Citigroup can rely on management's projections."

On Thursday, Taro dismissed IsZo Capital's claims out of hand. "Our management team’s primary focus continues to be on Taro’s core business, the performance of which speaks for itself," states Taro interim CEO Jim Kedrowski in a letter to Sheehy. He adds that the allegation that Taro was gaming its reserves "is simply untrue and your comment is, at a minimum, irresponsible to your fellow Taro shareholders."

Taro's response failed to persuade another minority shareholder, Grand Slam Capital Master Fund Ltd., which filed a lawsuit with the US Federal Court for the Southern District of New York on Friday. Grand Slam, which owns 55,000 Taro shares (worth $2.6 million), claims that Taro and its managers and directors have violated US Securities and Exchange Act and US Securities and Exchange Commission (SEC) rules.

Grand Slam claims that Taro's financial adviser Citigroup Global Markets Inc. incorrectly relied on the materially false and misleading projections from Taro and therefore its recommendation to vote in favor of Sun's acquisition offer is "wholly meaningless". Grand Slam claims that the summons to the general shareholders meeting includes misstatements and that the "defendants have breached their fiduciary duties by, among other things, failing to act in the interest of the company's public stockholders."

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